1.1 - 1.3 Introduction to micro economics Flashcards
(48 cards)
What is Scarcity?
A situation that arises because people have unlimited wants in the face of limited resources.
What is the difference/ distinction between needs and wants?
Needs are necessary to sustain human life e.g. air and food. Wants are things people would like to consume e.g. a trip to the cinema.
What are limited resources known as?
Factors of production - Capital, Enterprise, Land, Labour
What is a distinction/ difference between free goods and economic goods?
A free good is a good with zero opportunity costs. Therefore it can be produced in society in as much quantities needed with zero/ little effort. Free goods are not usually scarce whereas economic goods are scarce with an opportunity cost as a result.
Examples of free goods and economic goods.
free goods - air and water
economic goods - healthcare
What is the basic economic problem?
The fundamental economic problem faced by society is that of scarcity. This arises because people have unlimited wants in the face of limited resources therefore choices must be made.
What are the three economic agents?
Economic agents make choices and decisions these are firms, individuals and governments.
What is a positive statement?
A factual statement that can be tested against the facts. A positive statement may be right/ wrong. ‘‘will’’
What is a normative statement?
A statement involving a value judgement that is about what ought to be. It cannot be tested as a result. ‘‘should’’
What are economic agents?
Economic agents are responsible for making economics decisions using rationality. It’s also important to consider what economic agents are trying to achieve. Reflects incentives that affect behavior.
Households-
Make choices about their expenditure ( what goods and services to buy) and through this they need income and therefore make decisions on where to supply their labour to get this income. The objective and aim of households is to maximize utility.
Firms-
Make choices in which goods/services to produce, production techniques used and prices products/ services are sold at. Their aim is to maximize profit.
Governments-
Make choices on taxation, how to spend tax revenue and how to regulate markets. This ensures a stable economy. The objective of government is to maximize welfare for society.
What is Land?
All natural physical resources. It can also be physical space for fixed capital. The reward is rent. Examples include oil,coal, water and wheat.
What is Labour?
Human input into production. Human capital is the workforce of the economy. The reward is salary/wages from employment.
What is Capital?
Used to produce other consumer goods/services in the future. Examples include machines and buildings. The reward is interest from investments like shares or savings.
What is enterprise?
An individual who supplies products to a market to make a profit. This individual organised the factors of production and takes risks. Have a managerial ability. Th reward is profits which is an incentive to take risks as a result.
What is resource allocation?
The way in which a society’s productive assets are deployed across their alternative uses. Resource allocation is determined by the three economic agents.
Are the objectives/ aims of economic agents applicable to all economies/ individuals?
These objectives are not realistic and not applicable all because of the basic economic problem. Not everyone thinks rationally. Informational failure, persuasive advertising and increasing growth of sales instead of growth of profits and corporate social responsibility.
What are incentives?
Economics agents respond to incentives. This changes the behavior of economic agents as a result. Suppose a household realizes the price of a good has fallen. There will be an incentive to consume more of it as the cost has fallen relative to the benefit. If economic agents understand the incentives faced by other agents this may influence behavior as a result.
Is incentives effective?
Economics agents do not always respond to incentives they face. They may face conflicting incentives or they may choose not to respond. Incentives do not always bring about the best results in society. We cannot understand the behavior of economic agents unless we make assumptions about what they achieve and how they respond to economic circumstances and incentives.
Incentives on economic agents for resource allocation.
For an entrepreneur in a firm the incentive is to take risks for profit. Rewards are positive incentives making consumers better off whilst penalties make them worse off. When incentive are not given properly resources are mis allocated. Firms need an incentive to engage in risk taking so they innovate. Without innovation, production will cost more and there will be a misallocation of resources.
What is the coordination problem?
The market mechanism and central planning can be seen in the 3 main economy systems that almost all industrialised economies have adopted
Command economy
Mixed economy
Free market economy
What are free market economies?
Where governments leave markets to their own devices, so the market forces of supply and demand allocate scarce resources. There is no government intervention and decisions are taken by individuals and private firms.
• What to produce:
• determined by what the consumer prefers
• How to produce it:
• producers seek profits therefore produce at the lowest cost possible
• For whom to produce it:
• whoever has the greatest purchasing power in the economy, and is therefore able to buy the good